Category Archives: Derivatives

Is the debt form of a claim on a financial asset better or is an equity form of claims on financial assets better to serve as a new form of currency for a sovereign community?

Before I get to answer that question, I would like to first clarify again that the word “derivative” has been grossly misunderstood and has been mis-used in the media, especially in recent times after the global financial crises had happened.

Generically speaking, the word means what it means. Anything that is derived from something else is a “derivative”. Therefore “money” is in fact the world’s first “financial derivative”. It helped people save the troubles associated with a bartering system to swap goods for goods, to swap services for services or to swap goods for services and vice versa.

Hence the economic utility of a “financial derivative” could easily be understood. It is simply an alternative form of a claim on an asset that may serve better as a medium to swap between claims on different goods or services.

There are different derivatives such as simple derivatives vs. complex derivatives just as there are different types of people, i.e. thin people vs. fat people or care-free persons vs. deep thinkers, etc. There are good derivatives vs. bad derivatives just like there are good cholesterol vs. bad cholesterol in our human bodies. There are also derivatives based on equity ownerships vs. derivatives based on loose credit claims just as there are glass-and-steel building built on rock solid foundations vs. tall buildings that were hastily erected on quick sand that may be doomed to collapse.

So to carry on the conversation we would first have to let in those who could distinguish between the intellectual academic meaning of financial derivatives to join the conversation and let out those derivatives-bashers in public media who do not care about knowledge based intellectual pursuits.

The point I wanted to make is not another defense of derivatives but is rather that yes indeed, a currency should in fact be considered a form of a claim and hence a form of “financial derivatives” on certain assets a sovereign community owns. However, that unfortunately has not been the case in our modern world. The paper currencies, regarded as legal tenders and issued by may countries are in fact, very vague on what they are backed by.

The second question is that whether a claim of the equity ownership of financial assets that a country owns is better and safer than a claim on a debt obligation either collateralized on some financial assets or simply on the country’s verbal promise of its ability to pay better and safer.

These will be the subjects that I would like to continue to work on in future blog posts here in the coming months, hopefully with the active participation from many of the SwapRent.com blog readers. I have also set up a new group on Linkedin under the title “TARELV. Please feel free to sign up and leave your comments there as well.

TARELV is currently an on-going research project on alternative currencies and/or alternative exchange rate pegging systems that is open to the participation and contributions by the like-minded professionals, practititoners and academics who may share similar visions on a worldwide basis.

Please feel free to leave any feedback and comments on how you would like to participate in this group effort to further fine tune the new TARELV related concepts and methods.

This TARELV idea was originally developed on the back of the author’s last 10-year’s research work (as of 2011) that started back in 2001 on a new form of real estate derivatives SwapRent and a new form of non-derivatives based home ownership structure FARJHO.

As the idea has grown more mature through the years and the need of a brand new exchange rate pegging system to replace the existing fiat currency concept and Chartalism has become more and more transparent these days, the author would like to start to work with other economists and practitioners with similar passion in this field to hopefully bring this new exchange rate system to life together.

What the author believes in is that where both Assignats and Mandats in France back in 1796 as well as Rentenmark in Germany back in 1924 had failed to stay on as a major currency concept, given the current state of the global economy and the quantitative finance methods, TARELV may have a chance to make it in 2011 and beyond.

For a more detailed introduction to the new FARJHO methodology to use equity sharing to own homes one home at a time using only member level debt financing, here is the link to my white paper on FARJHO (https://www.box.com/s/cc0de069ab5c3fd3007e) which is to be published as a sequel to my earlier article on SwapRent (https://www.box.com/s/v24qtqip4hlgff5l1646) published in the December 2009 issue of the Journal of Housing Finance International (HFI) by the Brussels-based International Union of Housing Finance (IUHF).